Research

Theoretical investigations on network formation activities proceed under strong assumptions on how a link between two agents can be produced: typically link investments are assumed to be unweighted and links are formed either reciprocally or unilaterally. We propose a more general approach to link formation by allowing weighted link investment and employing a CES link formation function. This formulation has two advantages other than permitting a more flexible sponsorship of links. First, it nests the two commonly employed bilateral and unilateral link formation assumptions as special cases and thus enables robustness checks on existing works. Second, it introduces a variation in link investment substitutability and hence facilitates the analysis of how different link formation technologies affect network formation. We illustrate this approach through two applications: a game of pure network formation and a game of network formation with assorted activities. In both cases, greater link investment substitutability is associated with more unequal sponsoring of links and more diversity on network position and action choice of players. These structures have large welfare implications.

Network formation literature typically assumes that the creation and severing of a relationship is a decision made by the two ends of it. This paper enriches the range of investigation by analyzing a model where links can be formed via introductions from mutual friends. I assume that players who are heterogeneous in their attractiveness undergo a matching process where the set of feasible matches is defined by a network. I investigate how the incentive for making an introduction, when players’ objective is to enhance own matching outcome, depends on the endowment configuration and network positions. The characterization revolves around the structure of alternating path with a descending endowment pattern. I also examine the stability of networks based on introductions and welfare implications of such activities.